Thursday, August 2, 2012

Draghi Drags

Last week, I thought some of the comments on Mario Draghi's "uselessness" were excessive, but perhaps I was too indulgent. His remarks today seem to have disappointed nearly everyone after his seemingly bold foray last week. So is this another wet squib? Or is it a sign that the behind-the-scenes battle over the fate of the euro has become truly savage? My guess is that Draghi tried to shake things up a little last week, met with far more formidable internal opposition than he imagined (especially from Jens Weidmann of the Bundesbank), and chose the standard option of the losing general in a skirmish: beat a hasty retreat, keep the powder dry for the next battle, and wait for things to get worse while awaiting the arrival of the cavalry. Only in this case, Draghi is supposed to be the cavalry. So I guess he's waiting for an act of God to smite the opponent. So who shorted Spanish debt last week? Profit-taking time.

7 comments:

bert
said...

Art, I wouldn't assume that when he made his speech in London Draghi had perfect knowledge of the interpretation that would be placed on it by bond and equities traders. Or the effect that interpretation would have in the markets. Or the way in which this market reaction would require political statements to be issued and would encourage arbitrarily inflated expectations for this ECB meeting. In fact it should be obvious that to assume anything approaching perfect knowledge on his part would be a pretty glaring error. It's tough even to make a case that he was obviously stirring things up. Where he was forthright ("whatever it takes") he was saying nothing new; where he was arguably saying something new (the remarks about his mandate, for instance), he took care to keep it very cryptic.

Do you not know, my son, with how little wisdom the world is governed? If you're trying to construct a believable picture of what went on behind the scenes, I recommend Armando Ianucci as your go-to guy.

I think it’s worse than Draghi simply being useless. His bizarre combination of wildly overoptimistic rhetoric and the failure of the ECB to act as a normal central bank (particularly as the lender of last resort) is setting the stage for a euro disaster (With lots of help from Germany, of course).

One aspect of this (which I and others have previously mentioned but which I think bears frequent repetition) is the possibility for devastating bank runs. It seems to me that the cycle of optimistic announcements of action (inevitably followed by inaction), and the adoption of “fixes” that spark brief rallies that fizzle once it become clear that the fundamental, structural problems are left unaddressed, has caused a grave crisis of confidence in the ECB and the euro.

The relationship between the crisis of confidence that I have frequently described and the possibility of bank runs in Europe is explored in an excellent analysis by Marshall Auerback. Auerback makes the point that once it is accepted that there is a recognizable probability that at least one nation will leave the euro, there is a risk of devastating bank runs as euros move from banks in countries perceived to be likely to exit the euro to banks in the core. These problems and worries are simply worsened when leaders openly discuss the possibility of “Grexit.” We are already in the danger zone: There has been a huge and intensifying outflow of euros from banks in PIIGS countries towards banks in the core (especially in Germany and the Netherlands).

Another aspect of this which Auerback does not discuss, but which I think is important, is the problem of the euro as a sort of “artificial gold.” The ECB and Germany have made it abundantly clear that there are simply no circumstances under which the ECB will fire up the printing presses (except when the bankers have asked to be given more money for themselves). That is one of the main reasons why Nobel laureate Thomas Sargent described the euro as an artificial gold standard. http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4526

It is also important to remember that the gold standard greatly increases the risks of bank runs and intensifies their effects, even as it makes them very difficult for central banks to contain. The best example of this is the failure of the Creditanstalt (an event which many have said was the triggering event for the wave of bank failures of the Great Depression). Austria simply didn’t have enough gold on hand to stop the run and so the bankruptcy of a relatively small bank in a relatively small country lead to a huge crisis.

I thought I was being charitable when I called Draghi the useless man in Europe. Europe is soaked with gasoline and all the really “serious” people like Draghi are playing with matches.

To be perfectly clear, I do not in any way retract or soften my point that Mario Draghi is the most useless man in Europe. He is the head of the ECB. It is totally within the power of the supposedly independent central bank that he heads to end the current depression and to resolve the immediate crisis with the euro. He is not in any way obligated to promote austerity in the middle of a depression nor is he bound to maintain the euro as a form of artificial gold. He has done so only because he evidently thinks the current policies of his bank supporting austerity and opposing fiat money are the right ones.

Neither the Bundesbank nor the German foreign minister nor even Angela Merkel constitutes “internal opposition” to the head of the ECB. No central bank or government has a formal veto over the actions of the bank. If Germany is seen a having such a veto it is only because Draghi has surrendered his bank’s independence. The power to save Europe is easily within his mandate and, indeed, there are many knowledgeable people who say that only the ECB has the firepower necessary to get the job done.

Either Draghi approves of the present course Europe is on or he doesn’t. If he agrees then he’s a poor excuse for a human being and largely responsible for the Europe’s economic devastation and the needless suffering of millions of people. If Draghi hesitates because he is afraid to take the decisive action expected of a central banker in a time of crisis, then he is indeed a coward and the most useless man in Europe today.

Draghi is an ex-Goldman Sachs cadre. Ask yourselves how many other European leaders /central bankers today are from the same stable (the unelected Mario Monti?, Greek leaders?)and then ask what does Goldman Sachs think will be the best outcome from the Euroland crisis. The answer is unlikely to be what is in the best interest of the peoples of Europe. The stakes in this appalling financial gambling den are very high indeed. Time to restore capital punishment.

@ Mitch - It would seem the full power and force of the ECB to act, awaits promulgation by EU states by July 2013 of the European Stability Mechanism. This according, to Die Welt and other German media, appears to be a draconian and even dictatorial piece of financial connivance. See a You Tube video -- The Exorbitant Powers of the ESM-- posted by a German activist watchdog Abgeordneten-check (which monitors the way German MPs vote on various issues). Some of the quotes on the video can be found here (http://bit.ly/PJG6AG -- start at "among the treaty quotes...") and suggest the ESM is set to instate itself above all democratic power and judicial oversight. Are the voters of Europe being told the whole truth about this banker-driven crisis?

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I have been a student and observer of French politics since 1968. In that time I've translated more than 130 books from the French, including Tocqueville's Democracy in America and Thomas Piketty's Capital in the 21st Century. I chair the seminar for visiting scholars at Harvard's Center for European Studies and am a member of the editorial board of French Politics, Culture, and Society and of The Tocqueville Review/La revue Tocqueville. You can read some of my writing on French politics and history here and a short bio here. From time to time I will include posts by other students of France and French politics (accessible via the index link "guest"). My hope is that this site will become a gathering place for all who are interested in discussing and analyzing political life in France. You can keep track of posts on Twitter by following "artgoldhammer".